The U.S.’s eighth largest hotel company is banking on a simple message to get heard in a crowded field: Anything that doesn’t deliver “the right ROI” at owned properties won’t be passed onto franchisees.
NEWTON, Massachusetts ‒ Lessons learned as an asset-heavy owner itself and proactive change sparked by emerging opportunities in the marketplace have accelerated Sonesta International Hotels’ franchise portfolio of Sonesta brands from zero to 100 (properties) in the three years since it acquired RLH (Red Lion Hotel) Corp. to jumpstart franchise growth. As company executives said at Sonesta’s first-ever brand conference in May, 2024 in Las Vegas, that’s just for openers.
“Franchising will account for the overwhelming majority of Sonesta’s growth going forward,” Keith Pierce, executive vice president and president of franchise & development, told Hotel Investment Today in this exclusive interview.
“To make that happen, we have to communicate Sonesta’s key competitive points of difference to get our message heard – and acted on ‒ by owners, investors and developers,” he added. “We’re competing against major hotel brands that have been franchising for decades. However, we have a unique narrative that sets us apart from 100% asset-light brands: Yes, we manage 200 hotels and franchise 900, but we are also owners. We know first-hand the up- and downside of every brand-related decision. And, unlike typical big-brand franchisors, we’re private.”
ROI-justified “asks”
Applying that ownership filter to corporate and property-level strategies changes both the decision-making process and the outcome.
“Before we ask a franchisee with 100 rooms to upgrade or pay additional fees, typically we’ve tested those features over 45,000 rooms in our corporate portfolio. With that level of bottom-line impact, we’re very thoughtful when it comes to things like new standards and PIP programs,” said Pierce.
“We share our franchisees’ concerns about the capital requirements needed to achieve those goals within the given time frame,” he added. “We don’t telescope the deadline for our properties. It would be disingenuous to say that franchisees have one year but we have two or more. As owners, we have to see the ROI for every ask. If we don’t, that mandate won’t make it through to the franchise community.”
Pierce noted Sonesta is in the process of weighing value-for-money upside as it reviews its entire portfolio of roughly 200 managed hotels, intending to renovate the lion’s share of the portfolio. He expects the overhaul to take approximately three years, prioritizing the larger assets and higher profile locations.
“It goes back to this owner mentality,” said Pierce. “It keeps us transparent and fair. Sonesta’s owners are investing a half-billion dollars, give or take, in renovations and, alongside our corporate team, are evaluating which aspects generate the biggest paybacks.”
Rationalized brand offer
Growth is clearly a key objective for Sonesta moving forward. It made a major stride toward achieving those goals with the launch four new brands: Sonesta Essential and The James, and soft brands Classico and MOD while making all 13 brands available to franchise.
Along with the new additions, Sonesta corporate invested substantial time refocusing and right-sizing its business plan. Although Sonesta has aggressive growth targets, the company is cutting its number of brands, a move that runs countercurrent to the industry trend of more being more.
“We rationalized our portfolio of brands; we now have 13 brands versus 17. That’s counter to our competitors, who keep on adding brands,” said Pierce.
Pierce explained that the tightening of the brand portfolio primarily involved legacy flags from the company’s March 17, 2021, acquisition of Red Lion Hotels (RLH) Corp.’s brands that overlapped existing Sonesta brands or hadn’t established ample traction. One example was Hotel RL, which directly competed with the Sonesta Hotels & Resorts (SH&R) brand. The flag flew over just three hotels, and Sonesta’s leadership didn’t see the need for another full-service brand. So, the company retired Hotel RL, said Pierce. Also taken off the brand bar was Red Lion’s GuestHouse. Several brands were consolidated including Red Lion Hotel with Red Lion Inn & Suites while Sonesta Posada del Inca and Cruise Collection were rolled into SH&R.
“There was a little bit of addition, a little bit of subtraction,” remarked Pierce, “But in the end, it was about making sure that we had the right brand in the right segment so that we had all of the segments and swim lanes occupied and the lane markers were crystal clear.”
Breakout newcomer
One of the especially successful new brands is Sonesta Essential. In roughly one year, this upper mid-scale select service flag already has 16 hotels and 1,300 rooms open and operating. Six more hotels are set to debut this year, three are in development for 2025 and more are flowing into the pipeline. The new brand works for conversions and provides a less expensive option to fly a new flag than a hard-to-finance newbuild.
From the development team’s perspective, Sonesta Essential has been a hit with franchisees because the brand is based on feedback from owners, developers and guests. Sonesta reacted to their needs assessment with a product with “essential” brand standards the include 24-hour reception, a fitness center, hot complimentary breakfast, all-day coffee, high-speed WiFi and an elevated bedding program. A fast, friendly, flexible approach is key, particularly when operating an asset with narrow margins, added Pierce.
“We didn’t have a brand to offer owners and operators in that breakfast-only limited-service space that has just been exploding over the course of the last two decades,” said Pierce. “That was really one of the reasons that we created the Sonesta Essential brand; it was born out of interest from the development community, and it happens to now be our fastest-growing brand. It’s been fun to watch the Essential brand grow ‒ and grow so quickly.”
That “newness” paid dividends for consumers and owners, according to Pierce. “Consumers like the idea of comfort that allows them to own the experience at a price point that represents a value proposition for them,” he said. “Sonesta Essential also gives owners the opportunity to press rate up since, in the consumer’s mind, there’s a price point for rate but no price ceiling synonymous with the brand.”
More importantly for some owners, it is Sonesta’s only entry in this sector, which Pierce views as an important differentiator. “With some of the giant hotel brand families, owners are questioning the impact of brand saturation. They’re asking, ‘Are there too many of the parent company brands around me?’ They’re cross-selling on the same platforms, but the brand the owner chose could be #15 or #20 in the algorithms. And that doesn’t really give them the awareness they’re paying fees for,” he said.
More customers without sky-high fees
Sonesta also provided a business-boosting tool for its franchisees with the rollout of its unified loyalty program, Sonesta Travel Pass, and centralizing booking system. This integrated Red Lion’s portfolio and Sonesta’s in a booking engine that now includes 1,100 properties in all nine of the countries in which Sonesta has hotels and has more than six million members.
Even with this digital breakthrough, Sonesta’s not overlooking awareness-building opportunities at ground level. That spans customer recognition from adding a “by Sonesta” brand-reinforcing tagline to the Red Lion brands and Sonesta’s new soft brands to the rollout of a new signage program that puts the Sonesta connection front and center.
“It’s probably $7 million worth of signs. Because we’ve announced a fully integrated company, we’re putting the Sonesta tagline on Americas Best Value; we’re putting by Sonesta on Red Lion. We’re buying the exterior signs,” said Pierce. “By the time we get to the first quarter of next year and everyone’s driving the highways and byways, they’re going to see another nearly 600 new signs out there that have Sonesta on them.”
What’s ahead
What’s not a high priority for Sonesta’s near-term planning is new-brand creation for its own sake. “We don’t feel any internal pressure that’s telling us, ‘You have to create a new brand for a particular segment’,” he said.
“At some point we will get more aggressive growing internationally because once a company gets their North America platform up and running, it does start to become a little bit of rinse and repeat. But, for right now, we have ample opportunities for fast, strategic expansion in the U.S.”
SOURCE: Hotel Investment Today